Accusations Against Drug Wholesaler Expand

Pharmaceutical wholesaling giant McKesson Corp. faces widening litigation charging that it manipulated prescription drug prices, while its alleged co-conspirator in the purported scheme, a leading publisher of drug pricing data, moves closer to a settlement.

Connecticut and a San Francisco city health plan have filed separate civil racketeering complaints against McKesson, charging that, starting in 2001, the company fraudulently added a 5 percent markup to the average wholesale price of hundreds of brand-name drugs, costing the state and city health plans millions of dollars. San Francisco Health Plan’s suit seeks class-action status on behalf of all public-entity health plans in California.

The two suits, filed in U.S. District Court in Boston, follow a related complaint filed by several union health plans in 2005 against McKesson and First DataBank Inc., a unit of Hearst Corp. and a leading provider of drug price databases. On March 19, 2008, a federal judge certified the case as a nationwide class action on behalf of roughly 11,000 private third-party payers—including self-insured employers, insurers and union health plans—that reimbursed prescriptions based on average wholesale prices reported by First DataBank between 2001 and 2005.

Plaintiffs’ lawyers estimate the damages to third-party payers at more than $5 billion.

McKesson has not yet responded to the San Francisco Health Plan and Connecticut complaints, but has denied the allegations in the 2005 class action, asserting that it does not set average wholesale prices and did not conspire with First DataBank to do so.

Meanwhile, U.S. District Judge Patti B. Saris on May 30 granted preliminary approval to First DataBank’s proposed settlement of the 2005 class action.

Under the settlement—which awaits comment from class members and final approval—the San Bruno, California-based publisher will eliminate the 5 percent additional markup it included in its reported average wholesale prices for 1,356 drugs identified in the complaint, and pay the plaintiffs $1 million.

Independent of the settlement, First DataBank also announced in early June that it will similarly roll back reported average wholesale prices for other drugs not included in the settlement and will stop publishing average wholesale price data within two years of the pricing changes.

The average wholesale price adjustments aren’t likely to produce any savings for health plan sponsors, though First DataBank’s settlement could open the door for third-party payers to negotiate better deals with their pharmacy benefit managers, benefit managers say.

The racketeering suits filed by San Francisco Health Plan and Connecticut—which do not name First DataBank as a defendant—are the latest in a long-running legal battle over alleged manipulations of average wholesale price data by drug manufacturers and others. Average wholesale price data is used by third-party payers and PBMs as the basis for prescription reimbursements.

Since 2001, dozens of states, insurers and health plan sponsors have sued drug makers for allegedly inflating average wholesale price figures to increase payouts. In March, for example, 11 manufacturers, including Abbott Laboratories and Watson Pharmaceuticals, agreed to pay $125 million to settle a class-action suit charging that they massively inflated the cost of drugs covered under Medicare Part B.

San Francisco-based McKesson, the nation’s largest drug wholesaler, became a target in the average wholesale price litigation in 2005, when a group of union health plans charged that it had conspired with First DataBank to boost markups on hundreds of drugs.

Pharmacy chains and other retailers typically buy drugs from McKesson and other wholesalers on the basis of what is called wholesale acquisition cost, which is a benchmark price set by manufacturers. The pharmacies and PBMs, though, charge insurers and health plans on the basis of the average wholesale price, which is set by manufacturers and includes a markup over wholesale acquisition cost.

First DataBank has acted as an information source for the marketplace, compiling wholesale acquisition cost data on thousands of drugs and publishing average wholesale price data that was based on surveys of wholesalers until it halted the surveys in 2005.

The 2005 class-action suit—and the San Francisco Health Plan and Connecticut suits filed in May—charge that McKesson and First DataBank agreed to artificially boost average wholesale price figures to benefit McKesson’s retail pharmacy clients.

The suits allege that starting in late 2001, the two companies reached a secret agreement to raise the markup between wholesale acquisition cost and average wholesale price on more than 400 brand-name drugs to 25 percent from 20 percent. As part of this deal, First DataBank agreed not to use survey information from other wholesalers to establish the average wholesale prices for those drugs, but to rely solely on information supplied by McKesson, the suits allege.

The two companies camouflaged the alleged scheme by waiting until a drug manufacturer raised the underlying price of a drug before tacking on the additional 5 percent spread for that product, the suits allege. Several drug manufacturers asked First DataBank to explain the increases in their products’ average wholesale prices, but First DataBank stalled those inquiries and the manufacturers eventually acquiesced to the changes, the suits allege.

The alleged scheme ended in 2005, when First DataBank announced that it would stop conducting surveys to obtain average wholesale price data, court filings say.

The three complaints all charge McKesson with violating the federal Racketeer Influenced and Corrupt Organizations law along with various antitrust, unfair trade practices and consumer protection laws.

The two recent suits expand the scope of the litigation, bringing public-entity health plans into an action that until now has involved only private health insurers.